BDC NAV Problems Could Result in M&A
Let’s take a quick snapshot of the business development company (BDC) environment. After spending a few years riding the popularity wave, the small and mid-market lenders have hit a wall. The vast majority of publicly traded BDCs are trading below net asset value (NAV), meaning they cannot raise more capital from the public markets. And it’s possible that will result in M&A.
A hint of BDC M&A activity is already upon us. “The future is a bit uncertain, but it’s certainly an area where we’re fielding a lot of inquiries,” says Will Tuttle, Dechert partner.
Oak Hill Advisors LP assumed an external advisory role for the NGP Capital Resources Co., now known as OHA Investment Co.; PennantPark Floating Rate Capital Ltd. (Nasdaq: PFLT) acquired MCG Capital Corp.; and TICC Capital Corp. (NYSE: TICC) rejected a buyout offer from TPG Specialty Lending.
“In some situations, an existing BDC may be able to gain size and scale through a merger, and in other
instances, it may be an opportunity for someone who hasn’t managed a BDC to take over,” says Tuttle. In 2014, Oak Hill stepped in as NGP’s financial adviser when the BDC switched its focus to middle-market debt origination from upstream oil after a reviewing strategic alternatives. PennantPark’s MCG acquisition closed in August, expanding the BDC’s scale by enabling it to provide more loans.
A deal has not yet been reached for TICC, which is trading below NAV, but the BDC has received several offers, including one from TPG for $525 million. TICC also fielded a buyout offer from Benefit Street Partners LLC, but TICC says the deal did not receive enough support from stockholders to go through.
Either way, waves in the space make it more likely we’ll see transactions.
As banks retreated from smaller loans following the financial crisis and an increase in regulations, BDCs grew in popularity. But their stock prices have been taking a hit because of investor concerns about dividend payments, the credit cycle and some of them stretching for deals they should stay away from, according Aaron Peck, a managing director at Monroe Capital.
When the stock price of a public BDC drops too low, below NAV, the vehicles can’t raise any more public money. And mergers could potentially provide relief. For more, see Trading Low, BDCs Will Turn to Private Markets.
“Simply by having more shares outstanding, you tend to increase liquidity,” Tuttle says.